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Product Variety Without Tears
In an effort to stay competitive, a Fortune 500 health insurance company decided to offer its business consumers more choices in their plan options. The strategy almost backfired. After the next re-enrollment period, the insurer found that many corporate accounts were at risk. Why? Overwhelming execution errors frustrated its customers: companies whose employees either did not receive the proper insurance cards or were left without insurance because of lapses in sign-ups.
No one had anticipated this situation. The work to accommodate the extra choices had mostly focused on enabling IT systems. But as the insurer found, the true costs of complexity reside elsewhere: in this case, downstream in the form of new custom insurance cards and the administration associated with different networks.
This story may sound familiar. The financial services sector in particular has been prone to proliferation in product and service offerings-primarily because the cost of innovation in such transactional businesses is typically viewed to be "small" and confined to IT systems and support. In a recent study conducted jointly by Knowledge@ Wharton and George Group, 94 percent of financial service firms surveyed felt that continued offering proliferation is either a competitive requirement or at least a source of competitive advantage. The same survey found that nearly a quarter of financial service firms surveyed reported that their number of products and services more than doubled during the past five years.
To avoid these unintended consequences of product proliferation, executives need to weigh the benefits of launching new products against the often hidden and unintended costs of complexity that are sure to arise. Moreover, when financial services companies do add new products and services, they need to consider their strategies for making variety truly "customer-friendly." Only when investment decisions are made with "smart growth" in mind will the beast of complexity be tamed.
Strategies for Customer-Friendly Variety
Of course, engaging in proliferation is to risk "over-choice" - the phenomenon of overwhelming customers with an overly broad selection of offerings. Faced with too many choices, customers may tend to not choose rather than risk making the wrong choice. For example, recent studies have shown that 401(k) participation rates tend to decrease as the number of investment options increase. There are a number of reasons for this dynamic; one is that the larger the number of choices and features, the greater the customer's expectation of finding an ideal choice. In fact, as choice increases, the risk of making a bad choice also increases - the result being increased customer anxiety and a tendency to decide not to choose.
In response to growing over-choice, many financial services companies are attempting to differentiate themselves by choosing one of two paths:
- A "customer-as-designer" strategy
- A "choose for the customer" strategy
While a company can differentiate itself in the marketplace through either strategy, each approach has its own drawbacks. On closer investigation, neither strategy really addresses process complexity issues and in reality, each typically and unintentionally exacerbates the problem.
Customer-as-Designer Strategy
In this strategy, customers are asked to design their "perfect" product. This is not the same as proliferation in that customers are no longer faced with a large number of less-than-perfect offerings; instead, they customize their own perfect product across a suite of potential features and attributes.
To illustrate: health insurance is moving towards consumerism, where consumers become intimately involved in selecting their specific coverage needs. Customization can be an effective solution for the over-choice problem but it does come with a downside: over-choice is replaced with design burden because customers must now make all the decisions about which options to include. Deciding across a myriad of options can be taxing to customers, with the potential for high customer attrition during the process.
Customization also amplifies operational complexity, driving process inefficiencies and costs that arise when trying to support an ever-spiraling number of offerings. To fully understand the economics and risks to their businesses, companies employing a customer-as-designer strategy need to be ever-vigilant of the additional complexity costs borne downstream in sales and customer service processes.
Choose for the Customer Strategy
As an alternative to the "customer-as-designer" strategy, firms such as Capital One have chosen to avoid over-choice through a micro-segmentation strategy based on predictive analytics. They use these capabilities to essentially predict what a specific customer might want-and offer only that one offering to the customer. Over-choice and design burden are clearly avoided as the customer only has the choice of whether to accept or decline the offering.
Not surprisingly, choosing for the customer comes with its own challenges. First, effective execution requires significant analytical capability as the company must deeply understand its customer segments - an investment burden that can be too high for many companies. Second, it carries enormous risk, since failure in execution could have devastating effects on sales and/or customer adoption rates.
Lastly, process complexity issues associated with a "choose for the customer" strategy tend to increase over time as companies pursue more and more seemingly attractive (and lower volume) micro-segments. As with customization, companies employing this strategy take on more operational complexity. Companies going down this path must consider and incorporate the often hidden costs of this complexity into their investment decision-making.
Resolving the Variety vs. Efficiency Trade-off
As product and service proliferation continues to drive increased over-choice, more and more financial service firms will find themselves faced with the choice of a customer-as-designer strategy or one of choosing for the customer. Although either strategy can be an effective solution to over-choice, each has its own unique set of challenges. One challenge common to both strategies however is the tendency to exacerbate process complexity issues, making profitability untenable if left unchecked.
No matter how well companies manage the issue of over-choice, they must not ignore or underestimate the operational burdens that that their innovation engines can generate if left unattended. This means targeting innovation where it offers real value to the customer, quantifying the hidden costs of complexity and where appropriate, creating robust and flexible end-to-end processes capable of handling large amounts of variation from multiple offerings. Smart growth requires an aggressive drive to innovate with vigilant consideration of all facets and implications of new offerings to the business model.
In a market that demands customization and choice, the firm that is operationally flexible yet able to manage customer choice will be the one that succeeds. The new imperative for success is to win on both innovation and execution.
Dan Chow, senior vice president, George Group can be contacted at DChow@georgegroup.com.
Andrei Perumal, engagement director, George Group can be reached at APerumal@georgegroup.com.
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